It is a known fact that you cannot use your Individual Retirement Account (IRA) to invest in real estate. Although this is true with a traditional 401(k) or traditional IRA, you can invest in real estate through the use of a self-directed IRA.
A self-directed IRA is an IRA like any other under IRS guidelines in terms of annual contributions, required minimum distributions, and types such as Traditional, ROTH, Simple, and SEP. While most traditional IRAs limit your investments to publicly traded securities, self-directed IRAs are open to almost any investment, except for life insurance, collectibles, and S-Corporations.
Below are some key points you should review before you decide to use your self-directed IRA to purchase real estate:
- The property must be a new purchase directly into the IRA and cannot be a property you already own or a personal residence.
- You must have enough cash to purchase the property. You cannot take out a mortgage in your IRA to finance the purchase.
- You cannot borrow money from the property or use it as security for a loan.
- You and your relatives are barred from occupying or working on the property. If you are considering renting the property, you need a property manager to find tenants and all expenses for repairs and improvements must come out of the IRA.
While it is possible to use a self-directed IRA to purchase real estate it may become more complicated to manage its use than if it were purchased and operated outside of the IRA.
Feel free to give us a call if you have any questions or want to discuss this further.